Metropolitan Bank Holding Corp. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; balance-sheet comparisons are against December 31, 2017. The company is a New York bank holding company whose subsidiary, Metropolitan Commercial Bank, serves the New York metropolitan area, with commercial real estate and commercial and industrial lending among its primary businesses. Figures below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Financial performance and condition
- Q3 earnings: Net income was $7.1 million, versus $3.8 million a year earlier; diluted EPS was $0.85 versus $0.82. Net interest income rose 31% to $18.4 million. A $453,000 provision credit, compared with a $1.2 million provision in Q3 2017, reflected a $1.5 million recovery on previously charged-off loans.
- Nine-month earnings: Net income was $19.3 million, versus $9.0 million; diluted EPS was $2.31 versus $1.94. Net interest income increased 43% to $52.3 million.
- Margins and revenue: Net interest margin was 3.76% in Q3, up from 3.59%, and 3.70% for the nine months, up from 3.54%. Total interest income rose 34% in Q3 and 41% year to date, led by loan growth and higher overnight-deposit income. Interest expense rose 46% in Q3 and 31% year to date as deposit and borrowing costs increased.
- Non-interest items: Q3 non-interest income declined 9% to $2.0 million; nine-month non-interest income nearly doubled to $10.0 million, including growth in prepaid card income and foreign-currency conversion fees, plus a $500,000 termination fee for a discontinued relationship. Non-interest expense increased 21% in Q3 to $10.4 million and 39% year to date to $31.9 million, reflecting staffing, data processing and growth-related costs.
- Balance sheet and lending: Total assets were $1.93 billion, up from $1.76 billion at year-end. Gross loans grew 20% to $1.70 billion, or 88.1% of assets; growth included commercial real estate, multifamily and consumer loans. Total deposits rose 9% to $1.53 billion. Stockholders’ equity was $257.3 million, versus $236.9 million.
- Credit quality: The allowance for loan losses was $18.5 million, or 1.09% of loans, versus $14.9 million, or 1.05%, at year-end. Non-performing assets were $407,000, or 0.02% of assets, versus $3.4 million, or 0.19%. Accruing TDRs totaled $2.6 million; there were no non-accruing TDRs. The reported improvement in non-performing loans primarily reflected a residential real estate loan returning to performance.
- Cash flow and liquidity: Nine-month operating cash flow was $40.9 million; investing cash outflow was $295.0 million, primarily reflecting net loan growth; financing cash inflow was $147.3 million, including a $129.6 million increase in deposits. Cash and cash equivalents declined to $154.4 million from $261.2 million at year-end. Available-for-sale securities were $27.5 million.
- Debt and capital: FHLB advances were $60.0 million, up from $42.2 million. The company also had $20.6 million of trust preferred securities and $24.5 million of subordinated debt. The Bank was reported as “well capitalized”; its September 30 ratios included a 14.7% Tier 1 leverage ratio and a 17.6% total risk-based capital ratio.
Material changes versus comparable periods
- Earnings and net interest income increased substantially, largely reflecting a larger loan and interest-earning asset base, higher loan yields, and increased income on overnight deposits.
- Loan balances increased about $280 million from year-end, while the allowance rose about $3.6 million. Nine-month net recoveries were $1.3 million, primarily due to the $1.5 million recovery noted above.
- Deposit growth came from interest-bearing balances, while noninterest-bearing deposits declined from year-end. Interest-bearing deposit costs and borrowing costs increased as rates rose.
- Unrealized losses on securities available for sale increased to $1.0 million from $428,000 at year-end; management attributed them primarily to interest-rate movements and reported no impairment charge.
Outlook, commentary and risks
- The filing provides no quantified earnings or operating guidance. Management notes interim results are not necessarily indicative of full-year results.
- In October 2018, the Bank changed its policy to permit using up to 50% of digital-currency customer settlement-account balances, subject to limitations, for general funding. At September 30, settlement balances were $110.6 million, and digital-currency corporate accounts were $47.7 million. These customer balances and related foreign-currency activity may fluctuate.
- Management identifies credit estimates, economic and collateral conditions, interest rates, deposit flows, loan demand, competition, regulatory changes, technology and cyber events as risks. A 200-basis-point rate increase was modeled to raise one-year net interest income by 6.11%, while a 100-basis-point decrease was modeled to reduce it by 3.49%; the filing cautions that these simulations depend on uncertain assumptions. Economic value of equity was modeled to decline 6.50% under a 200-basis-point increase.
- The expected-credit-loss accounting standard (CECL) was not yet effective for the company; management was evaluating implementation and could not determine the eventual impact. Management expected a one-time cumulative allowance adjustment upon adoption.
- Management stated pending or threatened legal matters were not expected to have a material aggregate effect. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the $1.5 million loan recovery is nonrecurring and how credit costs develop as the rapidly growing loan portfolio seasons.
- The quality, concentration and performance of commercial real estate, C&I and consumer loans; past-due accruing loans included $328,000 over 90 days at quarter-end.
- The stability and cost of deposits, including digital-currency-related corporate and settlement balances, and the effects of the October 2018 settlement-funds policy change.
- Whether rising deposit and borrowing costs constrain net interest margin as rates and funding mix change.
- Reconciliation of deposit movements: the balance-sheet figures show noninterest-bearing deposits down about $39.9 million and interest-bearing deposits up about $169.4 million from year-end; portions of the MD&A describe different changes.
- The funding and liquidity implications of continued loan growth, unused credit lines and letters of credit, and the declining cash balance.
- The eventual CECL adoption impact and the continued adequacy of capital as regulatory capital-buffer requirements phase in.